As we conduct our fall financial clean up and individuals are revisiting their cash flows and budgets, some may be considering their charitable giving strategies and contribution amounts for the year. One powerful and flexible tool gaining popularity is the Donor Advised Fund (DAF). This innovative approach to philanthropy not only simplifies the giving process but also offers substantial tax incentives and benefits for those who are charitably inclined.
What is a Donor Advised Fund (DAF)? A Donor Advised Fund is a philanthropic vehicle that allows donors to make contributions to a fund, receive a tax deduction, and then donate stock from the fund to their favorite charities over time. Essentially, it’s like having a charitable savings account that can be strategically managed to giveback to causes near and dear to the donor.
As you start your tax planning for tax year 2024, you want to ensure you are thinking about all your options to mitigate and strategize your tax liability between now and the end of the year. With a donor advised fund, you are typically eligible to take an income tax deduction of the full fair-market value of the asset, up to 30% of your AGI. Furthermore, there are several strategies to mitigate or eliminate capital gains tax on long-term appreciated stock, if they’ve been held for more than a year. This is a strategy that many charitably inclined individuals with long-term appreciated stock like to implement into their tax and charitable giving strategy.
Some other benefits DAF’s provide is flexibility, because donors can take their time in recommending grants from the DAF to qualified charitable organizations, meaning they do not have to donate the grants right away or even at a specific time. This flexibility allows for strategic, thoughtful giving, especially during times of urgent need or for long-term projects. DAFs provide an opportunity for family involvement in philanthropy, it is a great way to continue generational contributions and get your children involved in charities they want to support. For those who prefer anonymity, donors have the options to remain anonymous when making grants from their fund as well.
Donors can invest the funds within the DAF, potentially allowing them to grow over time, allowing the potential donation to grow in size as well. Lastly, donor advised funds are a great way to streamline the record-keeping process of charitable giving, allowing them all to stream through the DAF and simplifying tax records and documentation. While these are only a few of the many advantages donor advised funds provide, discuss with a financial professional on the account opening process and if it makes sense for you.
Given the time of year, we like to discuss financial strategies as it relates to charitable giving. As we are now well underway approaching year end, contributing to a DAF becomes a particularly prudent strategy for those looking to maximize their charitable impact while optimizing tax benefits for the current year. If you have any questions on donor advised fund and their process, email info@shermanwealth.com.
